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HMRC internal manual

Business Income Manual

Specific deductions: employee benefit trusts: general-purpose EBTs: deductions for employers’ contributions: introduction

S12 Inheritance Act 1984, S38 Income Tax (Trading and Other Income) Act 2005, S1290 Corporation Tax Act 2009

Employers’ contributions to employee benefit trusts

Employers’ contributions to employee benefit trusts (EBTs) are usually allowable as a deduction (at some time) unless they are:

  • capital expenditure, see BIM44560, and/or
  • not wholly and exclusively for the purposes of the employer’s trade, see BIM44565.

Timing of deductions

The timing of when a deduction is given for a contribution to a general-purpose EBT, in computing an employer’s taxable trade profits, depends on:

  • when it is deducted in accounts prepared in accordance with generally accepted accounting practice, and
  • whether the timing of that deduction is deferred for tax purposes by specific legislation such as the EBT anti-avoidance legislation.

The EBT legislation broadly aligns the timing and amount of the employer’s deduction for contributions to general-purpose EBTs with the timing and amount on which the employee is chargeable to Income Tax and on which NICs liability arises.

Further guidance on the timing of deductions is at BIM44570 onwards.

Disallowing deductions - Inheritance Tax consequences

A report should be made to Specialist PT (IHT) where an EBT contribution has been disallowed as a deduction (whether the deduction has been deferred to a later period or disallowed altogether) if:

  • the company is a close company, and
  • any of its shareholders are beneficiaries or potential beneficiaries of the EBT, for example by:

    • being directors or employees of the company and not being excluded by the terms of the trust deed from benefiting from the EBT, or
    • in fact receiving benefits from the EBT (for example by receiving interest free loans), or
    • having assets of the EBT irrevocably ring fenced in a sub trust from which they may benefit.

In these cases a report should also be made to Specialist PT (IHT) if deductions for such contributions are allowed for a later period (see BIM44605).

The background to the need for such reports is that when an individual settles assets in a discretionary trust, a lifetime Inheritance Tax (IHT) charge may arise. Similarly, if a close company settles assets in a discretionary trust from which shareholders in the company may benefit, there may a lifetime IHT charge on the shareholders in proportion to their shareholdings. However, there are no IHT consequences if a close company makes a contribution to an EBT which is allowed as a deduction in computing the company’s taxable profits.

Reports should be made to

Specialist PT (IHT) Technical Group,
Meldrum House,
15 Drumsheugh Gardens,


or by e-mail to EBT, Meldrum (Specialist PT Trusts & Estates).